CBD Retail Goes Back to the Future

A retail renaissance is set to take place across Australia’s CBDs as governments invest in vital public transport infrastructure like the light rail which will support the expansion of retail outside of the core.

According to research from Colliers International, seasonally adjusted national retail sales data released by the Australian Bureau of Statistics continue to grow at 3.6 per cent year on year, just below the rolling 10 year average rate. Given the nation’s rotation toward the services orientated sectors, it’s unsurprising that retail sales are strongest within the south eastern states.

New South Wales and Victoria, now boast annualised growth rates of (4.95 per cent year on year) and (4.30 per cent year on year) respectively, comfortably exceeding the national average. Retail sales growth in resource orientated economies of Queensland and Western Australia are less impressive at just (1.2 per cent year on year) and (2.04 per cent year on year) respectively.

According to Michael Bate, Head of Retail and National Director at Colliers International, retail market conditions have been mixed across states, reflecting in part the ABS sales data trends.

“Within the CBD markets, our proprietary Colliers Edge data from Quarter 1 in 2016 (1Q16) suggests that rental growth has been the strongest in Sydney while incentive levels across almost all cities has remained broadly unchanged.

“CBD sales activity confirms this trend, with cap rates remaining the sharpest in Sydney and Melbourne, however we note that all CBD’s have experienced cap rate compression on an annualised basis.

“Going forward we expect apparel /department stores to maintain momentum and we should see some growth in cafes /restaurants as the impacts of the lower dollar and increased tourism take hold.

“The Light Rail really is a game-changer, especially for Sydney CBD retailers and harks back to the city’s glory days when trams connected shoppers with a network of department stores.

“Fast forward to today and with retail vacancy at negligible levels, the requirement for larger floor space in excess of 2,000 sqm and significant growth in white collar employment retailers will now be forced to look outside the core of the CBD to the north at Circular Quay and south towards Central Station. The backbone of this retail renaissance is light rail, increasing connectivity between outlets and facilitating the necessary foot traffic to support new retailers” he continued.

Sydney’s transformation has already begun with construction of the light rail currently underway on George Street and other areas adjacent to the CBD. The light rail is being supplemented by the Sydney Metro project that will extend from Sydney’s North West, through the CBD and then out to the South Western corridor. Both projects are expected to open for initial operation in 2019.

In Queensland, a plan for a proposed $1.54 billion Brisbane Metro was revealed in January this year, while the Queensland government has labelled the Cross River Rail as its highest priority infrastructure project. Both rail projects are aimed at increasing overall CBD transport efficiencies however funding for both projects has not yet been finalised.

In the Gold Coast, stage 1 of the light rail project has been completed, with stage 2 currently under construction. Stage 2 will connect the existing light rail network in the south to Helensvale station.

The reintroduction of light rail systems in Australia’s CBDs will not only alleviate congestion, it will facilitate the growth of retail precincts as the demand for amenity and retail sites increases.

“Over the past 5 years, we have witnessed the introduction of many offshore brands to our CBDs as the tastes of domestic consumers evolves. Brands such as Uniqlo, H&M, Zara and Topshop are not asking for 150m of space, they’re asking for 1,500sqm or more, often over multiple floors” said Mr Bate.

Nationally, investment volumes have risen swiftly in the 2016 calendar year to date and now sit at just under A$3.3 billion. Although this is still a long way off the volumes of 2015, investor demand for retail assets remains strong.

“The decision by institutions like Vicinity Centres and Blackstone to recycle capital has lifted overall transaction volumes,” said Lachlan MacGillivray, Head of Retail Investment Services at Colliers International.

OUTLOOKThe spatial demand from international retailers together with CBD transport infrastructure development should lead to rental growth over time. On the investment side, the demand for assets remains high as evident in recent transactional activity. The key challenge looking forward is simply the lack of stock availability coming to market.